Dereliction Of Duty: What is an Employee's Duty of Loyalty to the Employer? - December 2016

Terry Jessop & Bitner Newsletter

Issue 38, December 2016

Today's workforce is much more transitory than in the past. Gone are the days when employees expect to spend their entire career at one company. Studies suggest a worker will change employers every three to five years. With such short periods of employment, an employer is at a much greater risk of losing the value of training invested in an employee before the training pays off. Because of these short stints, there is a good chance that the employee's training will benefit a company's competitor when the employee leaves.

Companies can reduce the risk by entering into non-compete agreements with key employees, as discussed in a previous newsletter. Without such an agreement, a company has very little power to prevent former employees from using the skills they have learned to compete against the company when they leave. However, even without a written agreement, a company can prevent an employee from working against the company during their employment. The obligation an employee has to refrain from competing or working against the company's interest is included in an employee's duty of loyalty.

Preparation is the Key

Employers have a right to demand loyalty, but the free market encourages competition. These opposing interests make determining when an employee has violated the duty of loyalty more difficult. Generally, an employee may take actions in preparation to compete against the company before he leaves and without disclosure to the company. For example, an employee may register a new LLC that he plans to use to compete against his employer. An employee may even tell company clients of his intent to leave. But it does not take much to shift preparatory actions to full-blown competition. In the process of telling company clients he intends to leave, if an employee begins soliciting those clients to his new business, he is competing against his employer and has violated his duty of loyalty.

Facts Factor In

Because of the subtle line between preparation and competition, whether an employee has breached his duty of loyalty depends on the specific facts. For example, an employee may be allowed to negotiate her purchase of a competing business while still employed by the company because she is merely preparing to compete. However, if she uses company assets (computers, documents, phones, etc.) to help her in her efforts and does so while "on the clock," she has violated her duty of loyalty. Also, her position in the company and the level of trust placed upon her with respect to the company's proprietary and confidential information factors in. A manager who has access to confidential information and uses it to start a different business that could have produced a new revenue stream for the company is more likely to have breached his duty of loyalty than a low-level employee who has no access to such information and starts such a business.

Not Just 9 To 5

Although an employer may not expect an employee to "eat, sleep and breathe" the company 24/7, each employee has a duty of loyalty to her employer. Employees' personal lives remain their own, but each of them have responsibilities to the company that do not end when they are "off the clock." If you have questions or your company needs help drafting a loyalty policy, please contact us.

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